Economists have urged Treasurer Jim Chalmers to show greater spending restraint to take some heat out of the economy and spare Australians from more interest rate hikes.
With the economy already pushing up against its speed limit, a modest recovery in growth has driven inflation above the Reserve Bank’s comfort zone, economists at NAB and Commonwealth Bank said.
Economics teams at both banks now believe the RBA will raise the cash rate in February, with NAB’s Sally Auld predicting a follow-up hike in May, which would take the benchmark borrowing rate to 4.1 per cent.
At 2.1 per cent annually, the economy is growing faster than the RBA’s estimate for the maximum rate that can be maintained without adding to inflation.
Business surveys have indicated the gap between supply and demand in the economy is narrowing, also contributing to the recent acceleration in price growth.
HSBC chief economist Paul Bloxham said high capacity utilisation suggests the RBA may already have cut the cash rate a bit too far.
“Unless capacity utilisation now falls by a reasonable amount, it will be hard to get inflation to fall from here. And, of course, inflation is still above where the RBA needs it to be,” he said.
“One way to get there could be additional fiscal tightening, with a tangible cut back in government spending slowing demand, but we see this as unlikely.
“More likely, in our view, it signals that rate hikes will be needed in 2026.”
Dr Chalmers has said Wednesday’s mid-year budget update will be all about “delivery, responsibility and restraint”.
He has already flagged that the government has found $20 billion in savings, and includes “difficult decisions” such as not extending electricity rebates.
But new spending measures, such as $10 billion for housing supply promised during the election, and “unavoidable” upward revisions to items like natural disaster relief will continue to fuel the demand side of the economy.
The proof of the pudding will come in what veteran budget watcher Chris Richardson calls “the table of truth”, which sets out in irrefutable ink the impact of government decisions on the budget bottom line.
Since it was elected in 2022, the Albanese government has added a net $144 billion to spending across six budget updates, Mr Richardson said.
“That’s an average of $24 billion extra that decisions have added to spending every time the treasurer has presented a budget or budget update,” he wrote on X.
“I very much hope that Wednesday’s budget update will be much more serious about NET savings.”
Dr Auld said the recovery in the private sector was now pushing up demand to a greater extent than public spending, and the main issue facing the economy was low productivity growth constraining it over the short term.
“You can only really release that constraint over the medium term or the long run,” she told AAP.
“I think the treasurer has been pretty clear about saying, look to the next budget for a bigger picture reform agenda. So I don’t think we expect anything on that front tomorrow.”
The talk in the lead-up to the budget update seemed to show Dr Chalmers was intent on pulling back spending, she said.
“What that tells you is that, at the margin, the government is doing the right thing for an economy that’s possibly already starting to bump up against capacity constraints.”
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